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Energy Gems on the Gulf Coast

Despite—or because of—BP, these four energy “stocks under rocks” look like diamonds in the rough.

By Thomas M. Anderson, Contributing Editor
July 20, 2010

The BP oil spill, the deep-drilling moratorium, the toll on fishing and tourism, and a reputation as an economic backwater would seem to discourage serious investors from looking for local stocks native to Gulf of Mexico’s coastal region. But amid the bleak environment lurks opportunity, says a diehard booster of and expert on the regional economy.

That would be Peter Ricchiuti, a finance professor at Tulane University, in New Orleans, who specializes in analyzing small and midsize companies headquartered in the Gulf states. He calls these firms, rarely followed much by brokerage-firm analysts or mutual fund managers even in the good old days of Wall Street, “stocks under rocks,” and he’s used them as a teaching tool for 17 years. Each year Ricchiuti picks 40 companies, many in the energy field but also in regional standbys, such as agribusiness and retail, and assigns students in groups of four or five to research them thoroughly. The analysts-in-training meet the managements, analyze the industries and conservatively estimate the businesses’ intrinsic value. Their findings, called Burkenroad Reports, are available free at www.burkenroad.org. Below are four current picks from the energy sector. (For a glimpse back at some old picks, see Gulf Coast Stocks Hold Strong.) All share prices are as of the July 20 close.

The BP crisis has not diminished Ricchiuti’s enthusiasm for oil exploration. One of his favorite drilling companies is McMoRan Exploration (symbol MMR, $10.40). While many drillers are going into deeper water to find more oil and gas -- and are currently out of action -- MMR looks for hidden energy reserves in shallower waters. The New Orleans company has a swashbuckling streak. MMR names oil and natural-gas discoveries after pirates, such as Blackbeard and Davy Jones. This stock is a speculation on whether the company finds anything and what it finds, so the stock’s performance is known for wild ups and downs, befitting the energy business. Burkenroad’s analysts think the company’s prospects are strong for the next year and give it a 12-month price target of $16.50.

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Not all energy action in the Gulf Coast region is in the water. Denbury Resources (DNR, $14.96), another Burkenroad fave, pumps carbon dioxide into natural-gas and oil fields to recover the leftover energy. “It’s the Viagra of the oil patch,” Ricchiuti says. The Plano, Tex., company has larger carbon-dioxide reserves (there is such a thing!) and pipelines than its peers. The stock has run flat over the past year, but Burkenroad’s analysts allow think it could reach $18 sometime in the next 12 months.

Finally, northwestern Louisiana is home of the Haynesville Shale, a rock formation with the potential to be one of the largest natural-gas fields in the U.S. Gas producers pump a slurry of chemicals and water into the rock to crack it so more gas can escape and end up in pipelines. This process is known as hydraulic fracturing, or fracking, and it also is used on crudeoil wells. To keep the cracks open and the gas or oil flowing, many producers put tiny ceramic particles made by Carbo Ceramics (CRR, $78.98) in their fracturing mix. This Houston company has no debt, so it can pay for expansions more easily than its rivals. The stock has risen sharply recently and is at or near its five-year high point. Burkenroad’s analysts think it has gone beyond the $72 per share they estimate Carbo is worth. But the Tulane folks like the company enough that you are encouraged to wait for this one to fall below that target price and then buy it.

If you do not buy and sell individual stocks, you can bet on Burkenroad stock-picking talent through a small but established mutual fund that relies heavily on the students’ research. Over the past five years to July 19, Hancock Horizon Burkenroad (HYBUX), operated through Hancock Bank, a regional bank based in Mississippi, has delivered an annualized return of 3%, beating the typical fund that invests in small, undervalued companies by an average of three percentage points per year. Horizon is ahead of the Russell 2000 index of small- and mid-cap stocks since the fund’s formation in 2001. Its D shares levy no sales charge but carry above-average annual fees of 1.65%.